The big sell-off in global stockmarkets yesterday was sparked by a surprise move by Saudi Arabia to drive oil prices down. The coronavirus and the uncertainty it creates about the economic outlook remain the key ingredient in panicky markets – and this has also sparked the latest oil tensions. It led to market moves on a scale not seen since the financial crisis – and also to a package of emergency measures from the Government here.
Saudi Arabia's action followed a failure of oil producers in OPEC and Russia to agree on price cuts to support their income as demand falls on world markets due to the coronavirus. Moscow objected to the plan and Saudi Arabia reacted by saying it planned to increase production and discount prices. This move appears designed to put pressure on Russia but, with markets already concerned about slowing growth internationally, it led to a huge drop in oil prices and a knock-on impact on stockmarkets.
Financial markets are not perfect indicators of the economic future. But warning signs are now flashing, notably in interest rate markets, where longer-term rates have fallen to new lows. The fast spread of the virus will disrupt companies and lead to significant changes in consumer behaviour. The global airline and travel industries are the first to be hit but more will follow. Banks face new pressures from low interest rates. The disruption and the blow to confidence and activity from the virus will spread across economies.
What we don’t yet know is how long this will last. Indeed, this very uncertainty is damaging. For economies to stabilise, we first need signals that the spread of the virus is contained and is likely to abate. As of now, forecasting when this might happen with any certainty is very difficult and many recent indicators are worrying.
Short-term economic cost
The economic challenges from the virus are subsidiary to safeguarding public health. Indeed, in some cases making necessary calls in relation to health – such as the correct decision to cancel St Patrick’s day parades – will bring short-term economic cost and disruption. Increasing government spending, as well as meeting vital health needs and providing some supports to those affected, can also help to partly offset the hit from lower consumer spending.
The Government here made some announcements in this area yesterday, including new sick pay rules and additional spending on health and to support affected businesses. The concern for the Government, as outlined by Taoiseach Leo Varadkar, is the extent of the threat to public health in what could be a potentially lengthy emergency. The backdrop to negotiations on a new government has changed significantly as the severity of the threat from the coronvirus becomes evident. Suddenly the priorities have changed.